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Bretton Woods
System
Yingcong Lu
Introduction
The Bretton Woods system was a remarkable achievement of global
coordination. It established the U.S dollar as the global currency, taking
the world off of the gold standard. It created the World bank and
the International Monetary Fund. These two global organizations
would monitor the new system.
Bretton Woods established America as the dominant power behind
these two organizations and the world economy. That’s because it
replaced the gold standard with the U.S. dollar. After the agreement
was signed, America was the only country with the ability to print
dollars.
Bretton Woods Agreement
The Bretton Woods agreement was created in a 1944 conference of all of the World War II
Allied nations. It took place in Bretton Woods, New Hampshire. Under the agreement,
countries promised that their central banks would maintain fixed exchange rate between
their currencies and the dollar.
Members of the Bretton Woods system agreed to avoid any trade warfare. For example,
they wouldn’t lower their currencies strictly to increase trade.
But they could regulate their currencies under certain conditions. For example, they could
take action if foreign direct investment began to destabilize their economies. They could
also adjust their currency values to rebuild after a war.
• If a country’s currency value
became too weak relative to
the dollar, the bank would
buy up its currency in foreign
exchange market. That
would decrease the supply,
which would raise the price.
If its currency became too
high, the bank would print
more. That would increase
the supply and lower its
price.
How to maintain a fixed exchange
rate between other currencies
and the dollar
• By that time, the US had
accumulated over 70% of the
gold reserves of the world –
about 20 thousand metric
tonnes
• The US promised the
participating nations that the
dollar is convertible to gold
• The US had the most powerful
economy, which was based on
production and services
Why the U.S dollar was
accepted
• WW2 had significant negative
impact on many European
countries, economy recovery
is necessary for them
Results of the Agreement
The US dollar was established as an international reserve currency
The US dollar was backed by gold at a price of $35 per ounce and any country could exchange
dollars for gold
The International Monetary Fund (IMF) was formed to monitor and regulate financial
operations in the world and provide loans, often in the form of bailout funds, to balance out
fiscal deficits of nations
The World Bank was formed to finance the capital needed by developing countries for national
development programmes (ranging from infrastructure projects such as roads and highways to
social projects such as disease prevention and education)
Triffin dilemma
Due to money flowing out of the country through the Marshall Plan, U.S. military
budget and Americans buying foreign goods, the number of U.S dollar in circulation
exceeded the amount of gold that was backing them up in 1959.
In 1960s, a Yale professor Robert Triffin sat in front of Congress Economic Committee and
calmly announced that the Bretton Woods system was doomed. The dollar could not
survive as the world’s reserve currency without requiring the United States to run evergrowing deficits. And his Triffin dilemma explained the conflict of Bretton woods system.
Explanation of Triffin Dilemma
Triffin Dilemma point out the uncertainty and the potential crisis of Bretton Woods System. In this system,
dollar is linked to gold, other currencies are linked to the U.S dollar. In this situation, there are two requirements
for U.S dollar:
First, the US dollar circulating in the international market is sufficient to meet the needs of international trade
reserves. With the development of the world economy, the U.S. dollar required for international trade
continues to rise. Therefore, the U.S. must have a trade deficit and output dollars to other countries.
Second, as the global reserve currency, dollar has to be stable and strong, which means the U.S should have a
long-term trade surplus.
The two requirements are contradictory, so Triffin Dilemma determines the inevitability of the collapse of
Bretton Woods system.
The collapse of Bretton Woods System
In late 1960s, there was a dollar oversupply in the world economy. The US balance of
payments deficit was caused by expansionary fiscal policy. The spending of the US
government increased for three reasons: 1.the war in Vietnam; 2.welfare expenditure;
3 the space race with the USSR (send humans to the moon by the end of the 1960s).
In 1971, the United States was suffering from massive stagflation. That’s a deadly
combination of inflation and recession. It was partly a result of the dollar’s role as a
global currency. In response, President Nixon started to deflate the dollar’s value in
gold. But the plan backfired. In 1973, Nixon unhooked the value of the dollar from gold
altogether. Without price controls, gold quickly shot up to $120 per ounce in the free
market. The Bretton Woods system was over.
Thank you
Reference
• https://www.quora.com/What-is-the-significance-of-the-BrettonWoods-system
• https://www.thebalance.com/bretton-woods-system-and-1944agreement-3306133

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